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Testing for Trade-Induced Investment-Led Growth

  • Richard E. Baldwin
  • Elena Seghezza

Many studies have found a positive correlation between trade and growth, but do not attempt to identify the economic mechanisms involved. This paper attempts to identify one of the mechanisms linking trade and growth. In particular, we present a novel theoretical model that establishes a link between trade liberalization and investment-led growth. Estimating equations are derived from the model and estimated with three stage least squares on a cross-country data sample. We find that domestic protection depresses investment and thereby slows growth. Foreign trade barriers also lower domestic investment, but the anti-investment effect is weaker and is less robust to sample and specification changes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5416.

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Date of creation: Jan 1996
Date of revision:
Publication status: published as Seghezza, Elena & Baldwin, Richard E., 2008. "Testing for Trade-Induced Investment-Led Growth," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 61(2-3), pages 507-537.
Handle: RePEc:nbr:nberwo:5416
Note: ITI
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  1. Harrison, Ann, 1996. "Openness and growth: A time-series, cross-country analysis for developing countries," Journal of Development Economics, Elsevier, vol. 48(2), pages 419-447, March.
  2. Jong-Wha Lee, 1993. "International Trade, Distortions, and Long-Run Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 299-328, June.
  3. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
  4. Coe, D.T. & Helpman, E., 1993. "International R&D Spillovers," Papers 5-93, Tel Aviv.
  5. Jong-Wha Lee, 1994. "Capital Goods Imports and Long-Run Growth," NBER Working Papers 4725, National Bureau of Economic Research, Inc.
  6. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  7. J. Bradford De Long & Lawrence H. Summers, . "Equipment Investment and Economic Growth," J. Bradford De Long's Working Papers _122, University of California at Berkeley, Economics Department.
  8. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
  9. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  10. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-93, September.
  11. Edward E. Leamer, 1988. "Measures of Openness," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 145-204 National Bureau of Economic Research, Inc.
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